Question

Question 26

Given the data below, compute the standard deviation for stock B. Enter your answer in percentages rounded off to two decimal points.Do not enter % in the answer box.

Event	Probability	Returns
Pessimistic	25%	7%
Most Likely	50%	15%
Optimistic	25%	23%

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Question 27

Calculate the expected returns of your portfolio

Stock	Invest	Exp Ret
A	$301	2.6%
B	$649	19.9%
C	$497	28%

Note: Enter your answer in percentages rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 12.345% then enter as 12.35 in the answer box.

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Question 28

You have invested 29% in Stock A, 33.2% in Stock B, and the remainder in the risk free asset. You want a portfolio to be as risky as the market (i.e. you want the beta of your portfolio to equal 1). If Stock A has beta of 0.7, what is the beta of Stock B?

Note: Enter your answer rounded off to two decimal points. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Answer 1

Q26. Computation of Standard Deviation

Expected Return = Probabilty * Returns

Expected Return = 0.25 * 0.07 + 0.50 * 0.15 + 0.25 * 0.23

Expected Return = 15%

Standard Deviation = Square Root of Variance

Standard Deviation = Square Root of 0.0032

Standard Deviation = 5.66%

Q27. Expected Return of Portfolio

Expected Return of Portfolio = 19.08%

Q28 Computation of Beta of Stock B

Beta of Market = 1

Beta of Risk Free asset is always zero as it doesn't have any risk.

As we need the portfolio beta to be equal to market

Portfolio beta = 1

Beta of A * Weight of A + Beta of B * Weight of B + Beta of Risk free * Weight of Risk Free = 1

0.7 * 0.29 + Beta of B * 0.332 + 0 * 0.378 = 1

0.203 + Beta of B * 0.332 = 1

Beta of B = (1 - 0.203) / 0.332

Beta of B = 2.40

answered by: anonymous